I write about the Supreme Court, the intersection between the legal and business worlds, and occasionally about politics. I graduated from the University of Michigan Business and Law schools and the Columbia University Graduate School of Journalism. I started my career at Hughes Hubbard & Reed, a corporate law firm. After switching to journalism, I covered the corporate scandals at WorldCom and Adelphia, Eliot Spitzer, the SEC, and the Supreme Court as a reporter for the New York Law Journal. I have also written for American Lawyer Magazine and Legal Affairs Magazine, and authored Children of Armenia: A Forgotten Genocide and the Century-Long Struggle for Justice (Simon & Schuster). Feel free to subscribe to me on Facebook or follow me on Twitter: @mbobelian.

Appellate Court Resurrects The Rejected Settlement Between The SEC And Citigroup

In a procedural ruling yesterday, an appellate court strongly rebuffed Federal District Judge Jed S. Rakoff’s decision to scuttle the $285 million settlement the Securities and Exchange Commission had brokered with Citigroup last fall involving mortgage-backed securities.

The decision does not serve as a complete victory for the parties, however. Unlike most appeals, where the litigants maintain an “adversarial” posture, this case was unusual in that the two parties sided with one another. Instead, the district court essentially served as their adversary.

The appellate body will assign a lawyer to argue the district court’s position in the full-blown appeal before another three-member panel of the Second Circuit Court of Appeals. In the meantime, this ruling does delay the trial the district court had scheduled between the parties for this summer and serves as a harbinger for what the appellate court is likely to conclude for the final appeal.

Judge Rakoff originally rejected the settlement on the grounds that Citigroup did not admit to any wrongdoing for betting against mortgage-backed securities it sold to customers. Such settlements represented the norm not just at the SEC but with other federal agencies. And few judges asked to grant their imprimatur to these settlements questioned their fairness.

The district court judge stood at the front line of a minority of jurists willing to question the efficacy of these settlements. The lack of an admission of liability on Citigroup’s part, Judge Rakoff explained, made the settlement “neither reasonable, nor fair, nor adequate, nor in the public interest.”

He also complained that the $285 million the bank agreed to pay represented “pocket change to an entity as large as Citigroup” and left the “defrauded investors substantially short-changed.”

Observers at the Washington Post and other media outlets applauded the unorthodox ruling while the SEC and securities lawyers groused that Rakoff’s move undermined the regulator’s ability to do its job and second-guessed protracted negotiations conducted between sophisticated parties.

In filing an appeal, the agency’s Director of the Division of Enforcement, Robert Khuzami, argued that Rakoff’s “new standard is at odds with decades of court decisions that have upheld similar settlements by federal and state agencies across the country.”

This was not the first time Rakoff had threatened the status quo prized by the SEC. In 2009, he scuttled a settlement the agency negotiated with Bank of America involving bonuses paid to Merrill Lynch executives. That decision lacked the ripple effect of the Citigroup ruling, however, which inspired a handful of other federal judges to follow in Rakoff’s footsteps.

It seems that the Second Circuit Court of Appeals has put a stop to this budding movement.

Though the preliminary ruling did not serve as a final judgment, the appellate panel found that the regulator and bank “have a strong likelihood of success in their joint effort to overturn the district court’s ruling” and will likely prevail when a different panel of judges will rule on the merits of their appeal.

Judge Rakoff, the appellate panel held, “does not appear to have given deference to the SEC’s judgment on wholly discretionary matters of policy.” The proper function of a federal court, it went on, does not “dictate policy to executive administrative agencies.”

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.